New Liberal Economic System.

(World
bank, IMF and WTOs Stabilization, Structural
Adjustments and Trade Reform Programs)
Structural Adjustment Program of IMF
A First Look at Financial Programing
Perspective
• Developing countries such as Pakistan have been suffering from
problems like deficits in the balance of payments, budget deficits,
inflation, etc.
• These countries have been receiving foreign grants and concessional
loans, yet the problems were not solved. This continued for about
thirty years.
• Starting from 1980, International Financial Institutions such as the
International Monetary Fund (IMF) and World Bank started to
consider interventions in these economies and tied their foreign aid
to certain structural reforms.
Terminology
• Balance of trade (BoT) is the difference that is obtained from the
export and import of goods. Balance of payments (BoP) is the
difference between the inflow and outflow of foreign exchange.
• A budget deficit occurs when government expenditures exceed
revenues from taxes and other sources. Although the concept of a
budget deficit applies to any organization with operating revenues
and expenses, the term is most commonly applied to government
budgets.
General Perception
• General belief in developing countries : Washington
consensus has taken over and is influencing to suit
their own interest

• Own governments have lost all autonomy: Dictation

from WB and IMF

• Outside influence is not new

 Development and Export of Development
thinking
Model suggested in 1950s and 1960s: Focused entirely on growth ( trickle down)
The trickle-down theory essentially argues for income and capital gains tax breaks
to large businesses, investors, and entrepreneurs in order to stimulate economic
growth.

• Industrialization was the mechanism: import substitution (the satisfaction of a

greater proportion of a country's total demand for goods (production plus
imports) through its own domestic production).

• Realized that agriculture was neglected

• Poor human development indicators

Financial Programs
• A financial program (also called an adjustment program) is a comprehensive
and consistent set of policy measures designed to achieve a given set of
macroeconomic objectives.
• Financial programming is the process of designing these measures, which a
country is generally required to develop before receiving financial support from
the IMF.
• However, financial programming can be used in any situation in which national
authorities desire to formulate an internally consistent set of macroeconomic
policies aimed at maintaining or improving economic performance.
• Frequently, the policies are designed to correct disequilibrium between
aggregate domestic demand and supply, imbalances that are typically reflected
in balance of payments problems, rising inflation, and low output growth.
Aggregate demand and supply
• Aggregate demand is a term used in macroeconomics to describe the
total demand for goods produced domestically, including consumer
goods, services, and capital goods. Aggregate demand is the total
amount spent on domestic goods and services in an economy.
• Aggregate supply is an economy's gross domestic product (GDP),
the total amount a nation produces and sells.
From SAL to SAP
• 1970s: Smaller role, provision of loan for B.o.P
• Mid 70s: Commercial bank loans due to petrodollars
• Extensive, luxury consumption accumulation of debt
• Interest rates in US shot up to 18%Commercial
loans no longer available to finance projects and debt
servicing
• IMF steps in :
• Stabilization: BoP, cut domestic demand , money supply,
public spending, devaluation
• Recovery and growth
• Loans of longer duration : more conditions attached
SAP: Composition and Policies
• General: applied to countries irrespective of
differences
1. Trade policy: Export led path
1. Competitive exchange rate: devaluation
2. Lifting trade restrictions (quotas)
2. Fiscal Policy
1. Reduce fiscal deficits: Cut down public expenditure
2. Reform tax system
3. Cut or eliminate energy subsidies
IMF Policies
3) Public enterprises
1. Close down unprofitable public enterprises
2. Stop preferential treatment to public enterprises

4)Financial Sector
1. Improve regulatory framework
2. Relax interest rate ceilings
3. Restructure institutions
IMF Policies
5) Industrial Policy
1. Remove protectionism
2. Encourage industries that produce for export purposes

6) Agriculture
1. Remove bias against agriculture: remove protection to
industry
2. Discontinue subsidies
Methodology of Loans
• IMF provides financial resources to members on certain conditions
designed to encourage appropriate economic adjustment and to
ensure that the use of IMF resources is only temporary.
• IMF programs are monitored by various devices: performance
criteria, quantitative and structural (or qualitative) benchmarks, and
indicative targets.
• These devices are intended to be limited to those necessary to
evaluate program implementation in order to minimize IMF
involvement in the details of economic policymaking.
Implementation and Effects
• Large number of studies
• “We certainly cannot say whether the adoption of
programmes supported by the fund led to an
improvement in inflation and growth performance. In
fact, it is often found that programmes are associated
with a rise in inflation and fall in growth rate”
• Fiscal cut: Fall in investment and growth,
recessionary
• Erosion of industrial base in fragile economies due to
openness
A First Look at Financial Programing
Introduction

Since 1988, Pakistan’s economic policies, management

& performance have almost totally been determined by
the country’s adherence to IMF/WB sponsored SAP’s

The SAP’s are so minutely detailed that the govt has

little room to be innovative, and it merely follows the
steps outlined in the document ie no independent or
original economic program
Introduction
• The term “financial program” is commonly used to describe
adjustment programs that qualify for financial support from the IMF,
although the term may also be applied in the absence of an IMF
arrangement.
• In essence, a financial program is a comprehensive set of policy
measures designed to achieve a given set of macroeconomic goals.
• These goals could simply be to maintain the current level of economic
performance or, more often, they may aim to restore equilibrium
between aggregate domestic demand and supply, (Disequilibrium
between demand and supply typically manifests itself in balance of
payments problems, rising inflation, and low output growth).
Measures of a Financial Program
• The measures most often employed in a program include monetary, fiscal,
and exchange rate policies.
• As a practical consideration, financial data to monitor the implementation
of such policies are available on a more timely basis than other economic
data.
• But financial programs also incorporate other policy instruments, especially
those aimed at increasing aggregate supply ( the total amount of goods
(including services) supplied by businesses within a country at a given price
level. The higher the price level, the greater the incentive of businesses to
produce more of their goods for the market).
Features of a Financial Program
• The distinguishing feature of a financial program is that it seeks to
achieve an orderly adjustment, preferably through the early adoption
of corrective policy measures and the provision of appropriate
amounts of external financing.
• This should minimize losses in output and employment during the
adjustment period, while eventually leading to a balance of payments
position that is sustainable (a current account position that can be
financed on a lasting basis with the expected capital inflows).
• Such a program should also be consistent with adequate growth,
price stability, and the country’s ability to meet fully its external debt-
servicing obligations.
 History
• First loan: 1958
• Loan cancelled prior to the expiration date, and the entire
amount of the loan went unused

• Ayub govt: 2 more standby agreements, both with a

duration of 1 year each

• Z.A. Bhutto govt.: 4 more standby loans

• Prior to the mid-70’s, stabilization and SAP’s did not play

a major role in the management of the economies of the
third world.
History

• 1980: Pakistan entered into a long-term Extended

Fund Facility (EFF) for a period of 3 years under
Gen. Zia
• Amount was 3 times the amount lent post 1947

• Another long term agreement was signed by the

interim govt. after the death of Zia
• When Benazir’s govt. overtook office the very next day,
it ratified the already agreed program
• Sharif’s govt. was also bound by the covenants of the
agreement
History
• Another agreement signed in 1993
• Signed by the interim govt. of Moeen Qureshi, a former
WB staff member

• Agreed to policy framework paper

• Laid the basis for the more comprehensive, long-term

agreement made in 1994

• Was the program based on our needs, or was it imposed

by the WB/IMF members?
History
• BB comes into power for the 2nd time: handed over
a pre-prepared, detailed program to endorse

• Signed the extended 3 year facility

• Moeen’s govt. was responsible for framing the program

and getting it approved by the IMF; BB’s govt. just
‘stamped’ it.
History

• The only time a democratically elected govt. itself

took a loan was Nawaz Sharif’s second govt (97-99)

• A total of 4 agreements made b/w this govt. and the

IMF
• All 4 agreements suspended or abrogated
History
Which governments have completed programs?
• Nawaz Sharif’s second govt. completed its program or
fulfilled the agreement/ commitments to the IMF and WB

• Musharaf: Poverty Reduction and Growth Fund (01-04)

• Previous governments (88-99) had incomplete

implementations but core policy measures – devaluation,
price, exchange rate, interest rate and trade liberalization;
public enterprise reform; and subsidy withdrawal were
implemented however reluctant and slow they may have
been in the implementation
History
Based on the above:

• There are major political connotations to the SAP’s in

the context of Pakistan

• How much autonomy has the GoP had, since most of

these agreements were signed by interim
governments.
Implementation of the SAP’s: an examination of
the program

Structural adjustment programs are very specific and

are designed in detail
- References to trivial concerns, such as
• Telephone charges
• Deregulation of bus fares
• Water and sewerage tariffs
• Taxes and user charges for roads, rails and aviation
An examination of the program
Larger issues which the1988 program addressed:

• Improve financial internal and external balances

• Increase savings rate (esp. in the public sector)

• Encourage private sector investment

 An examination of the program
Key objectives:
Reduce the overall budgetary deficit gradually to a sustainable level (4.8% by 1991)

Contain the rate of inflation (gradual reduction to 6.5 by 1991)

Reduce the external current account deficit o sustainable level (2.6% by 1991)

• Reduce the external debt-service ratio (22% by 1991) a country's debt service ratio is the
ratio of its debt service payments (principal + interest) to its export earnings. A country's
international finances are healthier when this ratio is low. For most countries the ratio is between
0 and 20%.
•
Program Objectives
• Increase gross official foreign exchange reserves

• Contain the growth of domestic credit and money

supply in line with the growth of nominal GDP

• Sustain real GDP growth at above 5%

• Three key areas of reform: fiscal policy, foreign trade

policy, and the financial sector
Achievements and Failures of the
Program

• How can we determine the extent of its success?

• Identify program targets and then examine whether those
targets were met

• Targets
• GDP growth rates of 5.5% or above each year
• Increase investment and improve its efficiency
• Deregulation
• Adjustment in administered prices
• Better fiscal efforts
 Achievements and Failures
Fiscal Policy: implementation was weakest in this area
• Tax revenues as a % of GDP remained stagnant
• Steps taken in taxation
• numerous income and wealth tax exemptions were
eliminated
• simplification and rationalization of the tax structure
• Attempts to improve tax administration
• Actual results?
• Number of tax payers and coverage remained low
• A number of commodity categories exempt from the GST,
so progress in reducing concessions remained limited
Achievements and Failures
Trade and Balance of Payments: CA deficit declined

Step-wise reduction in maximum tariff rates

Elimination of many non tariff barriers

Import licenses were abolished

Exports increased sharply (11.5% p.a.)

Deterioration in services balance

Noticeable increase in FDI and foreign portfolio investment due to

foreign currency accounts: CA deficit decreased
 Achievements and Failures

Financial Sector
• Resident Pakistani’s were allowed to open foreign currency
accounts in Pakistan (frozen in 1998)

• Banks were authorized to increase interest rates on deposits

• MCB and ABL were sold to the private sector

• 10 new private sector commercial banks and 8 investment
banks were sanctioned
• Increased activity and capitalization in the stock market
• Rate of return on T-bills increased from 6 to 13%
 Achievements and Failures
Liberalization and Privatization:
• A forceful program of liberalizing the economy from
govt control undertaken
• Power generation, commercial and investment
banking, and air and sea transport opened to private
investors
• Sanctioning of private investment abolished
• Regulatory restrictions abolished
• Registration of technical and foreign loans
• Procedures for employment of foreign workers
 Achievements and Failures

Other Areas:
1. Agriculture
• Performance of the agricultural sector, particularly cotton,
improved significantly
• Subsidies on pesticides, seeds and agricultural machinery
were eliminated
• Prices of fertilizers adjusted upwards
2. Industry
• Industrial value added increased by 6.3% p.a.
• Large investments undertaken in all major energy sources
• Cotton industries dominated
Achievements and Failures

• Domestic savings increased (due to FCD’s)

• Energy prices increased by an average of 4% in real

terms
WB’s own opinion

‘While performance during the adjustment period has

been strong in GDP and export growth and in
structural reforms to encourage private sector
economic activity, it has been weaker in achieving a
sustained reduction in the fiscal deficit and in
improving external sector balances….lack of
significant improvement in poverty and social sector
indicators.’
WB/IMF’s evaluation of the program

• 4 key indicators which reflect the state of an

economy:
• GDP growth rates
• Budget deficit as a %age of GDP
• Current account deficit/GDP ratio
• Inflation rate
• The latter 3 indicators were way off target : the SAP
has often not been much of a success
WB/IMF’s evaluation of the program

• William McCleary (WB):

• Pakistan’s economy was doing well for itself, and then the
IMF intervened, after which it did somewhat better for a
few years
• Pakistan’s economy did well because the conditions
imposed on it were being followed.
• The IMF/WB policies were sound and things went bad
because of the poor management of the government
WB/IMF’s evaluation of the program

• Another View:
• The changes that have been made, as far as openness and
outward orientation are concerned, have been marginal
• savings/investments were off target
• Large fiscal deficits persisted
• Efforts at resource mobilization were not successful
Micro economic effects
• The impact was severe particularly on labor and the
poor
• GST and the subsequent inflation hurt the poor
• Cuts in govt. hiring to release pressure on govt.
expenditure increased unemployment
• Poverty returned to Pakistan following the IMF
programs
• Low GDP growth, lower employment and real wages, cuts
in public expenditure and in social development
Are Governments Autonomous?
• Govt.’s in underdeveloped countries are dependent
on and pressurized by events, factors, agencies and
institutions outside the realm of the govt. itself

• Foreign patronage of Third World Countries has been

the norm
• Local sensitivities are ignored since the govt.’s existence
depends on approval from several factors
Are Governments Autonomous?
• Numerous important political and governmental
decisions were influenced by Pakistan’s relationship
with Washington in its early years

• Foreign aid has been one of the sources of

development and growth in Pakistan
• Early Ayub period
• 1965 – Soviet invasion: Pakistan in US’s political disfavour
• Zia resisted external pressure from the IMF and WB, since
he was in a position to do so
• Post 9/11: govt.’s are willing to do anything to adhere to
the Washington consensus.
Did Pakistan need to go to the IMF?

Countries that apply to the IMF/Bank have the

following characteristics:
• Bad economic state
• BOP is in critical deficit
• Budget deficit is high
• Rampant inflation
• Growth rate is too low and unsustainable in the
long run
Did Pakistan need to go to the IMF?
• The overall growth performance of Pakistan has
been good
• 1980’s: all the main economic indicators showed
very decent trends
• Till 91-92, the economy continued to do quite well
• GDP growth rates at around 5% p.a
• Private investment increasing at 20% p.a since 1988
• Exports increased substantially
• Overall, the economy showed signs of immense
prosperity
• Pakistan’s economy was functioning adequately
without any assistance!
Conclusion
• Where macroeconomic imbalances exist, some form of correction must
ultimately be taken to bring claims on resources in line with those
available.
• If deliberate policy actions are not taken, the adjustment is likely to be
disorderly and inefficient. For example, reserves may be depleted and
creditors may become unwilling to lend further to a country.
• The adoption of a financial program, particularly when supported by the
use of IMF resources, offers a country the possibility of an orderly
adjustment that minimizes losses in output and employment and
ultimately restores the balance of payments to a sustainable basis.
Pakistan and IMF

Since 1988, Pakistan’s economic policies, management

& performance have almost totally been determined by
the country’s adherence to IMF/WB sponsored SAP’s

The SAP’s are so minutely detailed that the govt has

little room to be innovative, and it merely follows the
steps outlined in the document ie no independent or
original economic program